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Flashcards in Chapter 3 Deck (11)
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1
Q

Comparative advantage

A

• Ability of some entity to produce a good at a lower opportunity cost than another entity.

2
Q

Absolute advantage

A

• Ability of one entity to produce a product at a lower resource cost than another entity.

3
Q

What are the 3 reasons Adam Smith listed for why specialization would increase productivity?

A
  • Repetition. Worker becomes proficient in that one task.
  • Continuity. Specialized worker doesn’t spend the time switching between tasks -> efficiency and a consistent result.
  • Innovation. Specialized worker gets insights -> better production methods
4
Q

What’s an import? An export?

A
  • Import: good/service produced in a foreign country and bought by people at home.
  • Export: good/service produced at home and bought by people in a foreign country.
5
Q

What is outsourcing/offshoring?

A

When a domestic firm shifts part of its production to a different country.

6
Q

What are the 3 general outcomes of outsourcing?

A
  • Loss of domestic jobs, although that’s healthy for an economy.
  • Insourcing; jobs are shifted from other countries to home, partially or totally offsets job loss from outsourcing.
  • Lower prices for consumers and more output for firms. Jobs gained from these two effects either completely or partially offset jobs lost to outsourcing.
7
Q

Market economy

A

An economy in which people specialize and exchange goods and services in markets.

8
Q

What are the 4 government/social inventions that make markets more efficient?

A
  • Contracts: specifying the terms of exchange, facilitating exchange between strangers.
  • Insurance: reduces risk to entrepreneurs.
  • Patents: increase profitability of inventions, encouraging firms to develop new products and production processes.
  • Accounting rules: provide investors with reliable information about the financial performance of a firm.
9
Q

Centrally planned economy

A

Econ in which gov’t bureaucracy decides how much of each good to produce, how to produce the good, and who gets the good.

10
Q

What are the 4 kinds of market failure?

A
  • Pollution: gov’t just needs to ensure that polluters bear the full cost of their production and consumption decisions.
  • Public good: levees, national defense, parks, space exploration, etc.
  • Imperfect information: gov’t has to disseminate information in order to combat imperfect information and promote informed choices.
  • Imperfect competition: gov’t should foster competition, which leads to lower prices and more choices.
11
Q

Aside from protecting against market failure, what are the other 2 roles of gov’t in markets?

A
  • Establishing rules for market exchange and using police to enforce such rules.
  • Reducing economic uncertainty / providing for people who’ve experienced unforeseen difficulties / accidents.